Reasonable expectations in a closely held company

Many oppression statutes and decisions define oppressive conduct by reference to the minority owner’s reasonable expectations.

Objectively reasonable. Expectations must have been known to or assumed by the other owners at the time the relationship was formed, and central to the decision to join. A private hope is not enough.

Common expectations found reasonable. Continued employment in a company where the owners were employees; participation in management; a share of earnings through distributions or salary; access to information; and a market for the interest through a buy-sell mechanism.

Evidence. Discussions at formation, the governing documents, the parties’ course of dealing over years, comparable arrangements among other owners, and correspondence.

Documents that defeat the claim. An operating agreement expressly providing that employment is at will, that distributions are in the manager’s discretion, and that no owner is entitled to a position. Where the documents address the expectation, the documents generally govern.

Change over time. Expectations may evolve, and conduct accepted for years is harder to challenge.

Practical consequence for drafters. Address employment, distributions, information and exit expressly at formation. Silence is what allows this doctrine to operate, in both directions.